Monday, July 13, 2009

OUR FANTASY WORLD OF FINANCE

It used to be that "cooking the books" was an illegal practice. I suppose it still is for you and me. But apparently it is not for the Gangsters and their buddies in DC and on Wall Street.

In May, The Chosen One (aka Barry Obama) signed off on a writ that permitted banks to "restructure" loans in Mortgage Backed Security bonds (MBS bonds) with no legal consequences from MBS bondholders. In the past, MBS bondholders could sue if the bonds they held were altered or changed. No more.

What does this all mean? It means that "loan modifications" will be allowed that will permit banks to carry bad mortgages (those that are either "underwater" or in arrears) on their books as worth 100 cents on the dollar after they are "restructured." Nevermind that many (if not most) of these mortgages are worth less than 50 cents on the dollar. Under Obama's Writ, the banks will not be forced to do "mark to market" accounting on these assets. The result? Inflated balance sheets for the banks and more hefty bonuses for the fat cats who run them.

Because of this accounting trick, I'd be willing to bet that the second quarter earnings of, say, a Goldman Sachs or JP Morgan will be just as rosy as their questionable first quarter stats.

How long can the "smoke and mirrors" approach to creative accounting continue to fool the American taxpayer? Probably for a while. But those in the know in Europe and Asia will not be fooled; and they are the ones the Fed and Treasury depend on to buy our debt instruments. And they cannot be happy about the official policy of lying about asset valuations being perpetrated by DC and Wall Street.

Our fantasy world of finance may be about to crumble. It can't come too soon. Then perhaps some sort of rebuilding can begin.